The expectations game

No good deed goes unpunished

Palm Springs, 17-Apr-03. Since September of 2002, shares of Select Comfort Corporation (SCSS) have climbed steadily from around $4 to more than $12 at the end of January 2003. Then, after a brief retrenchment,shares resumed their climb, especially after the company boosted its earnings estimate for the first quarter.

Didn't I feel smug for having hitched my portfolio to this rising star and stuck by it through the thaw following the alleged "January effect"?

On Tuesday morning the company released its results for the first quarter of 2003. It was their first quarter with sales over $100 million, sales were up 26% over the same quarter the previous year, and same-store sales were up a whopping 30% over the same quarter of the previous year. Earnings per share came in exactly in line with the company's raised estimates and with "analysts' expections."

So what happened to leave this component of my portfolio looking like the victim of a MOAB? (Massive Ordnance Air Blast weapon, aka Mother of all Bombs)

As usual, the devil is in the "expectations." The company's "guidance" for the second quarter was for net sales in the $90-$95 million range, and they pointed out that the second quarter is "historically smaller than the first quarter for Select Comfort due to seasonal shopping patterns." Bam! Pow! Zap! The price of SCSS shares sank like a rock, reaching a low for the day of $9.95 almost immediately when trading opened on the Nasdaq, compared to the previous day's close of $11.251, a loss of nearly 12%.

Never mind that this guidance represented an increase of between 16% and 23% compared to the second quarter of last year! Never mind that SCSS earnings have grown every quarter since the end of December 2000 and has been profitable for 5 consecutive quarters. (It has only traded publicly since 1999.)

Hell hath no fury like an analyst disappointed!

Moral: It is very dangerous to hold a stock on the day the company reports its earnings.

Select Comfort is a small company headquartered in Minneapolis that makes specialty beds known as Sleep Number Beds. "Best of all, each side of the Sleep Number bed can be quickly and independently adjusted to the precise comfort level each partner prefers." (—company web site)